Ep 030 How to Start A Roth IRA (retirement) for your Future

Questions & Answers with the Real Wealth Whisperer

In today’s episode Casey asks the question of how much and are Roth Ira contributions tax deductible?

I want to share with you the basics of an IRA. Quite simply, an Individual Retirement Account or IRA is a retirement savings account. Inside an IRA, you can hold stocks, bonds, mutual funds, treasuries, cash, or certificates of deposit, notes and real estate for investment purposes. The main benefit of an IRA is that the investments you hold within it are allowed to grow tax-free.

• Investments are subject to a variety of taxes. For example, if you purchase a stock, the dividend income paid to you is subject to taxation. Similarly, if you buy a stock and sell it in a year for a profit, that profit is also taxed.
• Within an IRA, any money you make from your investments can grow tax-free. This, in turn, allows your wealth to accumulate faster. In a taxable account, your returns would constantly be reduced, obviously by the taxes owed.
• IRA’s are subject to limitations. For example, you could face a penalty charge of 10% for withdrawing any profits you have made before you turn age 59.5. In addition, there are limits to how much you can contribute annually to an IRA.

There are two main types of IRA’s — Traditional IRA’s, and Roth IRA’s

Understand Traditional IRA’s. A traditional IRA (Individual Retirement Account) allows you to make tax-deductible contributions. This means you do not need to pay any income taxes on income that you contribute to your Traditional IRA each year. For example, if you make $50,000 one year, and contribute $5,000 to your IRA, you will only pay tax on $45,000.

• You cannot withdraw any contributions or profits before age 59.5, or else you are subject to a 10% penalty tax.
• With a traditional IRA, you pay taxes when you withdraw the money, at which point they are taxed as if they are income. For example assume you turn 60, have $1 million in a Traditional IRA, and choose to withdraw $50,000 per year. That $50,000 would be taxed at whatever your income tax rate is at the time.
• If you are under 50, you can contribute $5,500 per year, and if you are over 50 you can contribute $6,500 per year.
• You must start making withdrawals before age 70.

Understand a Roth IRA. Roth IRA’s are similar to traditional IRA’s with one key difference — your Roth IRA contributions are not tax-deductible. This means if you contribute $5,000 of your income to a Roth IRA, you must pay tax on that income. The benefit is, unlike a Traditional IRA, you pay no taxes when you withdraw your money.

• This means if you withdraw $50,000 per year when you are 60, you receive $50,000 per year, completely tax-free. This benefits many people because incomes are often higher in old age, which means so are income taxes.
• Roth IRA’s also allow you to withdraw your contributions any time, tax-free. The key word here is contributions. Any profits from your contributions are subject to the 10% penalty tax unless withdrawn after 59.5.
• For example assume you are 40 have contributed $20,000, which has in turn made $10,000 in profits, giving you a total account value of $30,000. You can withdraw $20,000 (your contributions) without facing penalty, but if you withdraw $30,000 you will face a penalty tax on your $10,000 in profits.
• The contribution limits for a Roth IRA are the same as a traditional IRA.
• Unlike a traditional IRA, you do not need to make withdrawals before age 70.

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